Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk’. It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that CyberArk Software Ltd. (NASDAQ:CYBR) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is CyberArk Software’s Debt?
The image below, which you can click on for greater detail, shows that at December 2019 CyberArk Software had debt of US$485.1m, up from none in one year. However, its balance sheet shows it holds US$1.06b in cash, so it actually has US$579.7m net cash.
How Strong Is CyberArk Software’s Balance Sheet?
The latest balance sheet data shows that CyberArk Software had liabilities of US$192.7m due within a year, and liabilities of US$588.4m falling due after that. On the other hand, it had cash of US$1.06b and US$73.0m worth of receivables due within a year. So it can boast US$356.8m more liquid assets than total liabilities.
This short term liquidity is a sign that CyberArk Software could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that CyberArk Software has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we’re happy to report that CyberArk Software has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CyberArk Software’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. While CyberArk Software has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, CyberArk Software actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
While we empathize with investors who find debt concerning, you should keep in mind that CyberArk Software has net cash of US$579.7m, as well as more liquid assets than liabilities. The cherry on top was that in converted 252% of that EBIT to free cash flow, bringing in US$135m. So is CyberArk Software’s debt a risk? It doesn’t seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. For instance, we’ve identified 3 warning signs for CyberArk Software (1 is concerning) you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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